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Vietnam Today

Much to be gained

Released at: 23:17, 05/01/2015

Much to be gained

Vietnam's trade with European nations could be boosted in 2015 and beyond with the signing of the FTA but challenges lie ahead for both sides.

Dr. Andreas Stoffers, ASEAN Business Partners, Germany

The Year 2015 will mark a considerable dual anniversary: Vietnam and Germany, its largest trade partner in Europe, will celebrate 40 years of diplomatic relations, while Vietnam will also commemorate 25 years of relations with the European Union (EU).

Since the Delegation of the EU to Vietnam officially came into being in October 1995 the links between the two partners have emerged from a low-level relationship based on trade and official development assistance to an intensive, more diversified economic and political liaison. The final signing of a free trade agreement (FTA) in 2015 could be a fruitful and suitable gift for this international cooperation. However, it is worth analyzing and evaluating all of the opportunities and challenges for Vietnam as well as for the EU.

A promising end

Following their meeting at the European Commission in Brussels, Prime Minister Nguyen Tan Dung and EU President José Manuel Baroso stated on October 13 that: “We reaffirmed the importance of an early conclusion of the FTA between the EU and Vietnam, as a key instrument to further deepen the bilateral comprehensive partnership and strengthen the flourishing trade and investment relations on the basis of mutual benefit. We underscored that the completion of the FTA will help Vietnam integrate successfully as a market economy into the global economy. To this end, we instructed negotiators to intensify and complete their work in accordance with this agreed joint approach, under our leadership and the guidance of the EU Trade Commissioner and of Vietnam's Minister of Industry and Trade, with a view to concluding negotiations in the next few months.”

It seems that many years of negotiations are finally coming to a promising end. Due to various constraints on the Vietnamese side - and due to a wide range of demands from the Europeans - it seemed to spectators from outside that one day both sides would give up and the EU would shift its limited negotiation resources from Vietnam to another ASEAN nation. 

Development of EU-Vietnam relations

After “region-to-region” negotiations between the EU and ASEAN failed, bilateral negotiations between the EU and Vietnam began in June 2012 with the signing of a Partnership and Cooperation Agreement (PCA). This PCA replaced the Framework Cooperation Agreement (FCA) from 1995. The PCA reflects the recent development of EU-Vietnam relations by extending the focus - besides trade and investment - to further areas of cooperation such as energy, sustainability, the environment, science and technology, and compliance, as well as culture, migration and tourism.

In line with growing trade relations, Vietnam became a pivotal point for the EU’s endeavors in ASEAN. This is why the EU has chosen Vietnam to be the third ASEAN country - after Singapore (in March 2010) and Malaysia (in October 2010) - to enter into negotiations over an FTA. Bearing in mind the EU’s limited resources for negotiations on the one hand and the waiting list of ASEAN nations like Thailand and Indonesia on the other, this can be seen as a great appreciation of Vietnam and its prospects in the eyes of the Europeans. Germany, France, Italy and the other European countries would be disappointed to see the FTA postponed again in 2015 and to see all the effort vanish into thin air.

European perspective

Regardless, it is wrong to blame only one side for the difficulties in the FTA negotiations. For both partners the complexity of the various issues goes hand-in-hand with several points that have to be clarified before any agreement can be inked. As far as Europe is concerned, there is a huge trade deficit, which makes it more interesting for Vietnamese exporters (and European importers) to ease trade relations.

However, the EU is expecting a more liberal economic policy in Vietnam too. The FTA is providing European companies with better conditions and security for their activities in the Vietnamese market. Not only would tax and duties be reduced but also rules, standards, and regulations simplified. Sound legal protection, intellectual property rights, and compliance issues could be substantially improved.

Last but not least, a successful FTA with Vietnam would have positive effects on further negotiations with other ASEAN countries. After a low point in 2012, EuroCham Vietnam’s Business Climate Index (BCI) from the third quarter of 2014 demonstrates the growing confidence of European corporates in Vietnam. This positive perception of Vietnam can be partly explained by the improving macroeconomic outlook, the high expectations for the coming months, and the envisaged FTA. This hope should not be met with disappointment.

Pros and cons for Vietnam

For Vietnam, one of the greatest benefits is fuller integration into global markets. The EU is Vietnam’s second-largest trade partner. Due to recent disagreements with China over the East Sea, closer links to Europe can have a compensating and balancing effect on the growing influence of Vietnam’s big neighbor to the north. Backed by attractive conditions in the FTA, European technology can find its way to Vietnam, supporting the country in its efforts to become an industrialized country by 2020.

Moreover, an FTA would provide Vietnam with the opportunity to increase the efficiency of its economic structures, especially as far as small and medium-sized enterprises (SME) are concerned. The partly inefficient State owned enterprise (SOE) sector, however, may suffer from an FTA due to eased European access to the market.

The FTA’s effects on Vietnam’s wealth are expected to be remarkable. According to MUTRAP research, Vietnam’s exports to the EU could rise by 20 per cent. The effects on Vietnam’s GDP could also translate into notable growth of 2.7 per cent per annum. In particular, retailers with market access to the EU could benefit from this development. On the other hand, Vietnam would have to cope with emerging European competition, especially in the high-tech sector, which could make it difficult for Vietnamese companies to keep pace with highly-sophisticated European producers.

However, it could also increase the pressure on Vietnam to further develop its own industry. This could be a healthy opportunity for Vietnam to prevent itself from becoming caught in the “middle-income trap”. The consequences of an FTA would definitely vary from sector to sector. While many manufacturers, especially in the footwear and textile industry, profit from new markets, the agricultural industry could suffer. Nevertheless, in the long run the latter can also benefit by being introduced to improved production and food processing standards. At first glance, the strict European consumer protection regulations may seem as a stumbling block for Vietnam, but it could also serve as a blueprint for the country’s further development in ASEAN and competitiveness in global trade.

Looking ahead

The EU still considers Vietnam a key country in ASEAN. Located in the heart of one of the most promising regions in the world, Vietnam represents not only a large retail market of 90 million potential consumers with a growing middle class but also an essential bridgehead to Southeast Asia. If the FTA was rejected or delayed there would be negative consequences for the Vietnamese economy. With a shift of the EU’s focus to other Southeast Asian countries, Vietnam would lose the competitive advantage within ASEAN that would derive from the FTA.
Certainly, the consequences for each sector of the economy and each part of society have to be considered carefully. Disadvantages have to be smoothened, but in the end, the signing of the FTA soon would have positive socioeconomic effects and would result in growing mutual understanding. This agreement can serve as a perfect gift to mark the 25th anniversary of diplomatic relations between the EU and Vietnam. 

Prof. Dr. Andreas Stoffers is the founder and Managing Director of the Munich-based consulting firm ASEAN Business Partners GmbH (www.asean-bp.com) as well as full Professor for International Management at the University for Applied Languages/SDI Munich. As former Deutsche Bank Vietnam Executive Committee Member, Vice Chairman of the European Chamber of Commerce (Euro Cham), and Board Member of the German Business Association Vietnam (GBA), Dr. Stoffers has a deep insight into Vietnam and its relations with the EU.
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